Money

[Zip]

Thanks for the answer Steve.

But wouldn't the fact that gold was artificially held at $35/oz negate the claim to the $ having been on any sort of honest gold standard?

What about the discrepancy between the amount of currency in circulation VS the total amount of gold?

Would it be possible for other valuable commodities to be traded alongside of gold, to get around this problem, like a kind of holistic precious metals standard?

[agrippa1]

What about the discrepancy between the amount of currency in circulation VS the total amount of gold?

That's a valid concern, regardless of whether you're talking about massive influx of gold from a new find or the increasing need for currency in a growing economy. In either case, there is a sort of regulation that kicks in, in the form of gold consumption and production.

In a gold standard, the amount of currency would be held within the limits of the gold reserves of the issuing bank/gov't. As the economy grows, the price of gold remains constant (by definition), but because the real value of gold increases due to its use as a trading standard, the relative cost of all other goods in terms of gold/currency goes down, resulting in downward pressure on gold consumption. This increase in the relative value of gold drives up the profitability of gold production, so old, low-production mines, new technologies, and gold exploration become profitable and expand the production of gold until the profitability falls in line with other commercial ventures. As evidence, the rise in annual gold production from 1970 to today, from 1500 tons/yr to over 2500 tons/yr, and the current cost of gold production at almost $300/oz.

If a new windfall gold source is found (either through new mines or new technologies), the relative price of gold (to all other goods) falls, production becomes less profitable, and so production falls while consumption rises.

There is a lag in this process, so you will see periods of inflation and deflation followed by corrections to a stable gold/currency value. The problem I see, however, is the added value of gold induced by its use as a trading standard will tend to divert it from more efficient uses.

Would it be possible for other valuable commodities to be traded alongside of gold, to get around this problem, like a kind of holistic precious metals standard?

It was tried in the 1900's, when the U.S. fixed the dollar to both silver and gold. The upshot of that scheme was the commodity with the lowest market value, relative to its fixed price, was used exclusively while the other reverted to strictly commodity status. Friedman gives a good account of the details in Free to Choose. There are a few threads on this site that address other ways of using multiple commodities (search for symmetallism and bimetallism).

Fractional reserve banking provides the potential for increasing the money supply by allowing the market value of other commodities to be used as collateral for cash loans to artificially multiply the money supply from what would be possible using only gold as a currency backer. There are several threads on "fractional reserve banking" on this forum, which discuss the mechanisms and risks of fractional reserve banking.

[Steve D'Ippolito]

I really don't have a an answer for the part about the discrepancy between the amount of gold aboveground (approximately a 65 foot cube, if I recall) right now and the amount of currency in circulation, other than that of course a lot of the currency is really the result of fractional reserve banking and (if we opted to keep fractional reserve banking) it may turn out that the amount of gold is much closer to a match. If we did not opt to keep fractional reserve banking, who knows how it would work out--just remember that transitions, even to something good, are often a bitch.

True too the gold price at $35 an ounce was artificial and could not be sustained forever. That's part of the reason private citizens were not allowed to make the trade between gold and dollars. But the (other) point is the depression had been going on for three years BEFORE the gold was confiscated and the dollar devalued.